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Finance
Q:
A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.
Q:
Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.
Q:
A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.
Q:
A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.
Q:
Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.
Q:
When is it useful or sometimes necessary to compute the break-even point in terms of sales dollars rather than units of output?
Q:
The Knight Corporation projects that next year its fixed costs will total $240,000. Its only product sells for $34 per unit, of which $18 is a variable cost. The management of Knight is considering the purchase of a new machine that will lower the variable cost per unit to $14. The new machine, however, will add to fixed costs through an increase in depreciation expense. How large can the addition to fixed costs be in order to keep the firm's break-even point in units produced and sold unchanged?
Q:
The Western Boot Company will produce 94,000 pairs of boots next year. Variable costs are 35 percent of sales, while fixed costs total $223,000. At what price must each pair of boots be sold for Western to obtain an EBIT of $1,391,500?
Q:
Stan's Cans, Inc. expects to earn $150,000 next year after taxes on sales of $2,200,000. Stan's manufactures only one size of garbage can. Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece. Stan's tax rate is currently 34%.
a. What are the firm's expected fixed costs for next year?
b. What is the break-even point in units?
Q:
DXZ, Inc. currently produces one product which sells for $250 per unit. The company's fixed costs are $75,000 per year; variable costs are $205 per unit. A salesman has offered to sell the company a new piece of equipment which will increase fixed costs to $100,000. The salesman claims that the company's break-even point will not be altered if the company purchases this equipment. What will be the company's new variable cost per unit?
Q:
JKE, Inc. has a break-even sales level of $10,000,000 and has fixed costs of $4,000,000 per year. The selling price per unit is $200. What is the variable cost per unit?
Q:
Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order bicycles this year. Variable costs are 40 percent of sales while fixed costs total $600,000. At what price must each bicycle be sold for Wheely to earn EBIT of $450,000?
Q:
Techno Robots produces a functioning toy robot. At a production and sales level of 10,000 robots, the firm has the following information:
Selling price per unit = $15
Variable costs per unit = $8
EBIT = $17,500
What is the break-even point in units for the firm?
Q:
ABC Corp. has estimated the following income statement for its next fiscal year.Sales$20,000,000Variable costs6,000,000Revenue before fixed costs14,000,000Fixed costs9,000,000EBIT5,000,000Interest expense900,000Earnings before taxes4,100,000Taxes (35%)1,435,000Net income$2,665,000a. What is the break-even point in sales dollars for the firm?b. If the average unit cost is $20, what is the break-even point in units?
Q:
Voellers Upholstery Co. produces inexpensive leather chairs. The average selling price for one of the chairs is $400. The variable cost per chair is $250. Voellers has average fixed costs per year of $450,000.
a. What is the break-even point in units?
b. What is the break-even point in dollar sales?
c. What would be the operating profit or loss associated with the production and sale of
(1) 3,000 chairs, (2) 4,000 chairs?
Q:
All of the following will make the break-even point increase, other things equal, EXCEPT
A) fixed costs increase.
B) the sales price per unit is decreased due to competition.
C) variable costs increase due to higher direct labor cost.
D) the number of units sold for the year decreased.
Q:
Mix Sweet Shop bakes and sells pies. Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000 pies annually. What is the break-even point in sales dollars?
A) $3,100,000
B) $2,875,000
C) $1,705,000
D) $1,625,000
Q:
Mix Sweet Shop bakes and sells pies. Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000 pies annually. What is the break-even point in pies?
A) 190,440
B) 280,000
C) 200,000
D) 110,000
Q:
Which of the following would be considered a variable cost in a manufacturing setting?
A) rent
B) administrative salaries
C) insurance
D) direct labor
Q:
Which of the following would be considered a fixed cost in a manufacturing setting?
A) depreciation
B) direct labor
C) sales commissions
D) direct materials
Q:
The break-even point in sales dollars is convenient if
A) the firm sells a large amount of one product.
B) the firm deals with more than one product.
C) the price per unit is very low.
D) depreciation expense is high.
Q:
Rogue Tire Masters has fixed costs of $220,000. Tires sell for $95 each and have a unit variable cost of $45. What is Rogue's break-even point in units?
A) 4,000
B) 4,400
C) 5,200
D) 5,500
Q:
Based on the data contained in Table A, what is the break-even point in sales dollars?
TABLE A Average selling price per unit
$18.00 Variable cost per unit
$13.00 Units sold
400,000 Fixed costs
$650,000 Interest expense
$50,000 A) $2,340,000
B) $1,850,000
C) $1,775,500
D) $700,000
Q:
Based on the data contained in Table A, what is the break-even point in units produced and sold?TABLE AAverage selling price per unit$18.00Variable cost per unit$13.00Units sold400,000Fixed costs$650,000Interest expense$50,000A) 130,000B) 140,000C) 150,000D) 180,000
Q:
Break-even analysis is used to study the effect on EBIT of changes in all of the following EXCEPT
A) corporate taxes.
B) prices.
C) cost structure.
D) volume.
Q:
Potential applications of the break-even model include
A) replacement for time-adjusted capital budgeting techniques.
B) pricing policy.
C) optimizing the cash-marketable securities position of a firm.
D) all of the above.
Q:
A plant may remain operating when sales are depressed
A) if the selling price per unit exceeds the variable cost per unit.
B) to help the local economy.
C) in an effort to cover at least some of the variable cost.
D) unless variable costs are zero when production is zero.
Q:
Which of the following is a fixed cost?
A) insurance
B) direct material
C) direct labor
D) freight costs on products
Q:
Variable costs include all of the following EXCEPT
A) property taxes.
B) direct labor.
C) sales commissions.
D) annual rent.
Q:
QuadCity Manufacturing, Inc. reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate = 35%. QuadCity's break-even point in sales dollars is
A) $2,050,633.
B) $2,197,500.
C) $2,438,750.
D) $2,785,000.
Q:
HomeCraft makes wooden play sets. The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year. Each play set requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs of $100. Fixed advertising expenses equal $100,000 per year. Each play set sells for $3,200. What is HomeCraft's break-even output level?
A) 340 play sets
B) 325 play sets
C) 297 play sets
D) 258 play sets
Q:
The break-even point is equal to
A) fixed costs divided by (sales price per unit - variable cost per unit).
B) fixed costs divided by unit variable costs.
C) fixed costs divided by selling price per unit.
D) (sales price per unit - variable cost per unit) times the fixed costs.
Q:
As production levels increase,
A) variable costs per unit decrease.
B) fixed costs per unit increase.
C) fixed costs per unit stay the same and variable costs per unit increase.
D) fixed costs per unit decrease and variable costs per unit stay the same.
Q:
The break-even model enables the manager of the firm to
A) calculate the minimum price of common stock for certain situations.
B) set appropriate equilibrium thresholds.
C) determine the quantity of output that must be sold to cover all operating costs.
D) determine the optimal amount of debt financing to use.
Q:
Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kohler's controller discovered one cost that was $10 per pound no matter what the production level for the year. This is an example of a
A) variable cost.
B) fixed cost.
C) semivariable cost.
D) semifixed cost.
Q:
Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kohler's controller discovered one cost that was $10 per pound at a production level of 8 million pounds, $8 per pound at a production level of 10 million pounds, and $5 per pound at a production level of 16 million pounds. This is an example of a
A) variable cost.
B) fixed cost.
C) semivariable cost.
D) semifixed cost.
Q:
Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.
Q:
In break-even analysis, semivariable costs are segregated into their fixed and variable components over the relevant range of output.
Q:
Fixed operating costs include charges incurred from the firm's use of debt financing.
Q:
Depreciation is considered a fixed cost.
Q:
Jones Blanket Company sells blankets for $25 each. The variable cost of each blanket is $10. If fixed cost is $4,500,000, then the break-even point is 300,000 units.
Q:
Over the relevant range of output, fixed costs remain unchanged.
Q:
Fixed costs per unit vary inversely with production output.
Q:
If fixed costs are $150,000, price per unit is $10, and variable cost per unit is $4, the break-even point is 15,000 units.
Q:
The break-even model assumes that selling price per unit and variable cost per unit of output are constant over the relevant range of output.
Q:
If sales double, the break-even model assumes that total variable costs will double.
Q:
A decrease in the level of production results in decreased fixed cost per unit.
Q:
As the volume of production increases the variable cost-per unit of the product decreases.
Q:
Fixed costs are called indirect costs while variable costs are called direct costs.
Q:
Break-even analysis ignores fixed costs because fixed costs do not change.
Q:
As production levels increase, fixed costs stay the same in total, but decrease on a per unit basis.
Q:
Break-even analysis is a short-term concept because, in the long run, all costs are variable.
Q:
The break-even quantity of output is that quantity of output, in units, that results in an EBIT equal to zero.
Q:
A key tool for evaluating business risk is break-even analysis.
Q:
Describe the sources of business risk.
Q:
What are the three determinants of the volatility of a firm's earnings?
Q:
Business risk refers to
A) the risk associated with financing a firm with debt.
B) the variability of a firm's expected earnings before interest and taxes.
C) the uncertainty associated with a firm's CAPM.
D) the variability of a firm's stock price.
Q:
A high degree of variability in a firm's earnings before interest and taxes refers to
A) business risk.
B) financial risk.
C) financial leverage.
D) operating leverage.
Q:
The four basic determinants of business risk include all of the following EXCEPT
A) the stability of the domestic economy.
B) the level of fixed cost used in the company's production process.
C) sensitivity to the business cycle.
D) competitive pressures in the firm's industry.
Q:
Companies that sell basic necessities face the highest levels of business risk because consumers will price shop aggressively for items they purchase on a regular basis.
Q:
Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.
Q:
Business risk refers to the relative dispersion (variability) of a company's net income.
Q:
Variation in a company's income stream results from its choice of business line, its choice of an operating cost structure, and its choice of a capital structure.
Q:
Sales of consumer durable goods, such as appliances, are more sensitive to swings in the business cycle, and therefore companies in these industries face a higher level of operating risk.
Q:
The three major components responsible for variation in a company's income stream are business risk, operating risk, and financial risk.
Q:
Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.
Q:
Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.
Q:
A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.
Q:
Changes in capital spending are not incorporated directly into capital budgeting problems because the amounts are included in the operating cash flows through the inclusion of depreciation expense.
Q:
Operating cash flow is equal to the change in EBIT less the change in interest expense, less the change in taxes, plus the change in depreciation.
Q:
In a replacement decision, the initial outlay is equal to the cost of the new asset less the reduction in depreciation from elimination of the old asset.
Q:
The initial outlay includes the cost of purchasing the asset and getting is operational, but this excludes any training costs for employees which should be included as part of differential cash flows over the life of the project.
Q:
The initial outlay includes the cost of purchasing the asset and getting it operational, including the purchase price, shipping and installation, and any training costs for employees who will be operating the equipment, and any increases in working capital requirements.
Q:
In general, a project's free cash flows will fall into one of three categories: (1) incremental costs, (2) sunk costs, and (3) opportunity costs.
Q:
Increases in inventory and accounts receivable expected to occur if a proposed advertising campaign is undertaken are examples of sunk costs.
Q:
Capital budgeting projects that expand sales are more likely to involve increases in working capital than are projects that involve the replacement of existing assets.
Q:
Free cash flow calculations can be broken down into three parts: cash flows from operations, cash flows associated with working-capital requirements, and financing cash flows relating to interest and dividend payments.
Q:
Depreciation expense produces a cash inflow equal to the depreciation expense multiplied by the firm's marginal tax rate.
Q:
Depreciation is a non-cash deduction so it may be ignored in the calculation of a project's incremental after-tax cash flows.
Q:
Interest payments on debt are not included in a project's incremental cash flows, but are instead accounted for in the project's discount rate.